Any dividend yield above 3% is worth investigating, I reckon, so let's take a closer look at two firms that are paying well in excess of that figure.
At today's share price around 180p, McColl's Retail Group(LSE: MCLS) has a forward dividend yield of just over 5.7% for the year to November and expects forward earnings from its chain of convenience stores to cover the payout 1.7 times.
Meanwhile, at a share price of 2,594p, Bellway(LSE: BWY), the housebuilding company, has a forward yield running at 4.6% or so for the year to July 2018 and City analysts following the firm expect forward earnings to cover the payout almost 2.9 times.
Too tempting to ignore
These are big yields and are too tempting to ignore, although the characteristics backing up the dividend payments vary between the two firms.
McColl's retail chain strikes me as a defensive operation because the stores sell 'essential' food items close to the point of need. Sure enough, the firm's record of cash generation is impressive with net cash from operations showing a rising trend and comfortably exceeding net profits in each reporting period. However, although the dividend payment seems secure, the pace of dividend increases is slow.
Bellway is pushing up the dividend fast, but cash generation falls short of profits in most periods, although earnings cover the dividend payment well. Whereas McColl's runs a defensive operation, there's no denying that housebuilders such as Bellway operate in one of the most cyclical industries around. That said, since dipping on apparent wider macroeconomic worries in July last year, Bellway's shares have shot up around 40% and there could be more to come judging by the numbers forecast for growth in earnings.
In December, chief executive Jonathan Miller said the firm recently passed the milestone of opening its 1,000th convenience store. However, that should grow fast as it plans to acquire 298 more stores from the Co-Op during 2017, and with ongoing trading being described by the directors as robust, I reckon the growth story here could have much further to run. This makes the forward price-to-earnings (P/E) ratio of around 10.5 seem modest.
Bellway's chief executive Ted Ayres said earlier this month in a trading update that legal completions and the order book are both up. Market conditions remain positive and the firm is therefore not holding back from investing in land and building work. Bellway might run a cyclical business, but the growth numbers flowing from operations can't be denied. However, when profits are high, as now, I would expect the P/E ratio to remain low and today's forward rating around 7.5 seems like a fair valuation.
As part of a diversified portfolio, I think both firms deserve your consideration for their attractive dividend and steady growth prospects.
Dividend-led investing has a lot going for it and The Motley Fool analysts have pinned down another opportunity after shares went soft for this company and the value on offer improved.
This firm pays a growing dividend, which is covered well by projected earnings. The directors have pushed the dividend higher for several years and that situation looks set to continue.
Kevin Godbold owns shares in McColl's Retail Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.